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IT vendors in search of new business code [China Daily: US Edition]

(China Daily: US Edition Via Acquire Media NewsEdge) Foreign tech companies are caught in the middle of a cybersecurity conflict between the two biggest economies, reports Gao Yuan.

Less than 10 kilometers north of Tian'anmen Square in Beijing sits a 39-story office building known as Pangu, next to the 2008 Olympic venue Bird's Nest. This "five-star" workplace was named after a being that, according to Chinese mythology, was the creator of all.

The dragon-shaped plaza, on the north-south axis of the nation's capital, reflects many themes and images from traditional Chinese culture, and many domestic companies have chosen Pangu as their headquarters, even though the building is rather far away from the city's main business districts.

The biggest tenant of Pangu is not a domestic company, and it doesn't even have a Chinese name.

Hundreds of IBM Corp employees have called it home since 2010.

Following the idea of being "close to power", the United States-based technology giant must be hoping Pangu could bless its China business three decades after it entered the world's largest technology market.

Everything was going well until this summer.

In May, media reports said the government would order the removal of Big Blue's servers from the banking industry, one of the most valuable markets for IBM in China.

The company quickly responded, stressing its longstanding partnership with the Chinese government.

Yet the incident still worried other foreign technology companies, which were concerned that bans on their business could be implemented to strengthen information security.

Their worries quickly came true, as the government later ousted Microsoft Corp's Windows 8 operating system and Symantec Corp's security software from the government procurement list.

Industry and Information Technology Minister Miao Wei warned that China's information security could face a "direct threat" if the government failed to run a thorough background check on companies.

Analysts noted that the sudden barriers to overseas IT companies were imposed after the US Department of Justice accused five Chinese military officers of stealing business information on line from US companies.

China denied the charges and raised its own information security concerns.

In late May, the State Internet Information Office announced that China will review information technology products used in key industries and government agencies to "maintain national security and protect the public interest".

What that means in practice is that all IT hardware, software and even consulting services provided by foreign companies will undergo close government scrutiny before being put into use.

The policy seems to be a source of concern for US firms operating in China."More approval processes will make the Chinese government and State-owned enterprises more cautious when selecting IT vendors,"said Gene Cao, a senior analyst at Forrester Research Inc.

Over the past two years, the Chinese government and SOEs have become less ready to buy imported IT products, he said.

But analysts said although China is determined to use domestic IT products in strategically important industries, it may take years - if not decades - for the country to be able to abandon IBM, Oracle Corp and EMC Corp.

Wang Pei, research manager at research firm International Data Corp, known as IDC, told China Daily that the technology gap between Chinese and overseas vendors is still large, especially in the high-end enterprise use market.

"Chinese providers have the smallest gap in the enterprise-level data-loss prevention market, in which they are about three years behind. So you can imagine the situation in other high-tech segments," said Wang.

Earlier this month, news portal Sohu posted an internal document believed to be from the Ministry of Public Security, which told its branches to delete Symantec's security software and replace it with domestic applications. That step was likely aimed at US companies.

Top European companies, such as SAPAG, a Germany-based enterprise software provider, and Dassault Systemes SA, a French industrial designing software company, are not affected although their products are also widely used in key sectors.

Tech companies from China and the US have been caught in the crossfire of the escalating Sino-US cybersecurity conflict, said Charlie Dai, principal consulting analyst from Forrester." Security has been a bargaining chip used by both sides to protect their domestic markets against foreign competitors for a longtime," he said.

Lenovo's $2.3 billion deal to purchase IBM's x86 server business is still awaiting approval from the US government six months after the acquisition was announced. Sources familiar with the matter described the negotiations as "extremely difficult", although top executives of Lenovo expressed optimism that the deal will be closed by the end of this year.

Ren Zhengfei, founder and president of Huawei, criticized the US in a rare interview in June."The US does not want to see a strong China,"Ren said."Huawei is not what the US really wants to target. What they want is to strike at China."
The telecom equipment maker has shifted its overseas focus toward Europe after years of failed attempts to sign a deal in the US because of security barriers.

Analysts said the US companies are facing a similar situation in China. Microsoft, IBM and Cisco Systems Inc have expressed concerns to China Daily about recent restrictions. But the companies seem unable to deal with the issue, because they can't influence policy in China.

"Of course, we value the Chinese market and have a strong willingness to serve government and SOE customers. I hope my colleagues from our government relations team can persuade industry regulators and bring our customers back," said a senior IBM manager who sells enterprise software in China.

"I am not optimistic about our business in government procurement projects because we are obviously not in favor,"he told China Daily on condition of anonymity because the matter is sensitive.

While the national security issue casts a shadow over US companies, Chinese tech enterprises are eyeing business that previously belonged to foreign competitors.

Inspur Co Ltd, a Jinan, Shandong-based server manufacturer, saw its China x86 server shipments nearly quadruple in the first quarter of this year, according to industry researcher Gartner Inc.

The company's price advantage and local customers' security concerns helped drive the surge, according to Gartner, adding that Inspur's market share is poised to increase in the coming quarters.

Kingsoft Co Ltd, a Beijing-based software firm, aims to sell more than 70 percent of its office software through government purchase deals this year after reports said Microsoft's Office suite had been abandoned by State-level organizations.

Kingsoft sold two-thirds of its own version of Office to the government last year.

"The push to use Chinese IT products has offered a golden chance for local companies to gain ground,"said Zhang Yumu, vice-president of Beijing Rising Information Technology Co Ltd, the largest local security software provider.

Government agencies, SOEs and organizations serving key industries such as energy, healthcare and finance will be the first batch to use domestic products, solutions and services, analysts said.